A two-year treasury strip has yield and three treasury strip

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Reference no: EM131835074

Rate Anticipation swap (reinvest)

A two-year Treasury strip has a yield of 4.4%, and the three Treasury strip has a yield of 5.29%. Marry thinks the one-year interest rate will be 5.04% in two years, and she willing to put her money where her mouth is. (Assume that all securities are zero-coupon securities, and that market participates can lead and borrow at the same rate)

A) What is the price of the two-year Treasury strip? $

B) What is the price of the three-year Treasury strip? $

C) If Marry buys the two years Treasury and reinvests the proceeds from the two-year Treasury into a one-year Treasury, then how many two-year Treasuries does Marry need to buy today if she wants $1,000 in three years?

% (Answer as a percent of $1,000 par value)

D) If Marry wants $1,000 in three years, how much money would Marry needs to spend on the two-year Treasury if she expects to roll the proceeds over in the second year at 5.04%?

E) According to the expectation hypotheses, what rate does the market expect the one-year rate will be in two years?

Reference no: EM131835074

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